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Donovan says FHA taking steps to avoid bailout

Dec. 7, 2012 – Shaun Donovan, secretary of the Department of Housing and Urban Development, told the Senate Banking Committee Thursday that he can’t guarantee the Federal Housing Administration will not require a taxpayer-funded bail out, but said it is taking steps to ensure that won’t happen.

Donovan was appearing before the Senate Banking Committee just weeks after the FHA reported it may not be holding enough in reserves to cover a projected $16.3 billion net worth deficit, setting the stage for possible taxpayer-funded support.

When the FHA announced its financial shortcomings last month, it said it would revise its loss mitigation program to target deeper levels of payment relief for struggling borrowers, expand the use of short sales, and continue to streamline policies to increase efficiency and decrease losses associated with foreclosure sales. It also said it is committed to selling at least 10,000 distressed loans per quarter over the next year. It also said it will raise the annual insurance premium paid by borrowers by 10 basis points, or 0.1 percent.

Donovan said the FHA is also considering another increase in premiums but said going too far with hikes could have a detrimental impact on the housing market. He added that the financial issues facing FHA are the result of business conducted during 2007-2009. Business done since 2010 has outperformed pre-crisis business, he noted. Additionally, he said, the single-largest variable in the health of FHA going forward is housing prices. If the market keeps improving, the situation of FHA will keep improving, he said.

NAFCU has repeatedly expressed its support for the FHA.

Thursday’s hearing also included some discussion of the lockout periods set at FHA vs. Fannie Mae and Freddie Mac. NAFCU has also urged changes in FHA’s lockout period, which is shorter than that set by the other entities, to discourage strategic defaults on mortgages.